Business CoachingHuman Resourcessmall-businessSmall Business Taxes: A Beginners Guide

January 9, 2023by mcdabrianna1

Small Business Taxes: A Beginners Guide

Looking for guidance navigating the challenging world of taxes as a small business owner? Do you need advice on filing taxes and understanding the latest tax laws?

Small business owners and entrepreneurs may find it difficult to file their taxes.  However, it doesn’t have to be.  Any small business must understand how to pay taxes correctly since it might mean the difference between success and failure.

This guide is intended to help you comprehend and handle your taxes in 2023 so you can concentrate on expanding your company. Let’s get started!

Types of Small Business Taxes

 

Taxes for small businesses can be challenging and differ widely depending on the type of enterprise you are operating. There are numerous types of taxes that small businesses must be aware of. Due to the potential effects on their bottom line, small business owners need to be aware of the numerous taxes.

The main types of taxes that small businesses should consider include the following:

  • Payroll Taxes
  • Property Taxes
  • Income Tax
  • Sales Tax
  • Self-Employment Taxes
1. Payroll Taxes

Employers are required to pay payroll taxes, which are levied against employee earnings. A portion of the employee’s pay, bonus, or other compensation is used to determine how much of these taxes are due.

Payroll taxes generally include the following:

  • Social Security
  • Medicare
  • Unemployment Insurance
  • State Disability Insurance

The majority of payroll tax revenue collected by the federal government comes from Social Security and Medicare taxes, also referred to as FICA (Federal Insurance Contributions Act) taxes. Additionally, employers are in charge of deducting income taxes from workers’ paychecks for submission to the Internal Revenue Service (IRS).

Employers must fill out and submit a number of forms as part of the payroll tax system, which can be confusing, in order to stay in compliance with federal requirements. Depending on the number of employees they have and the size of their organization, employers are required to pay federal payroll taxes at particular intervals throughout the year.

Businesses in some states must additionally pay state payroll taxes on a regular basis, and in these places, employers may need to file numerous tax forms annually to comply with all regulations. Employers must also notify the IRS yearly of any changes to an employee’s pay or perks.

2. Property Taxes

Real estate and tangible personal property are subject to property taxes, which are dependent on ownership. The value of the relevant property serves as the basis for this tax. It can assist in funding community services including parks, public safety, education, and infrastructure upgrades.

These taxes vary greatly from state to state, even within a single county.  However, they are determined by multiplying the assessed value of the property by the applicable tax rate established by the local government.

Periodic reassessments of property tax assessments ensure that tax authorities are able to collect revenue at fair market value. To ensure accuracy when assessing taxes, owners should keep track of any modifications or additions to their properties as these could impact the taxable value. It’s crucial for owners to keep up with any local law changes that can have an influence on their property tax costs.

3. Income Tax

Income taxes are a type of taxation levied by the government on people and companies who make money. These taxes are determined based on the total income earned during a certain year, less any applicable deductions or modifications.

They often have a progressive tax structure, which means that people with greater incomes pay higher tax rates. Public works and services like roads, schools, and senior retirement benefits can be paid for by income taxes.

These taxes can also be used to encourage companies to invest in their local communities and create jobs. States may have different income tax laws, and some may provide tax credits or deductions to people with lesser incomes.

However, some forms of income, such as capital gains or self-employment income, may be taxed at a higher rate than others. To guarantee compliance with all applicable regulations, both individuals and corporations are required to accurately record their income each year and pay the appropriate taxes owed within the specified time limit.

4. Sales Tax

The government levies a certain kind of tax on retail purchases known as sales taxes. Each state has a different sales tax rate. In some states, in addition to the state rate, municipal governments additionally levy sales taxes.

This tax is gathered at the moment of sale and paid to the government by the seller or buyer in accordance with any applicable rules. Sales taxes, like the majority of other types of taxes, only apply to physical goods like food and clothing, not to services.

However, some services, including entrance fees to amusement parks or tickets to sporting events, might be subject to sales tax depending on your area. Businesses that collect sales taxes are required to maintain accurate records and submit their returns on time.

Additionally, based on their own sales history and the applicable laws in their state, firms must determine how much sales tax they owe and when it is due. There may be severe repercussions for breaking these rules, such as fines or jail time.

5. Self-Employment Taxes

Taxes that self-employed people are required to pay to the Internal Revenue Service are referred to as self-employment taxes (IRS). These taxes, sometimes referred to as FICA levies, include Social Security and Medicare contributions.

You must pay self-employment tax at a combined rate of 15.3% on all net business income, including contract or freelance income, if you are a self-employed person. 12.4% of the 15.3% rate goes into Social Security taxes, and 2.9% goes toward Medicare taxes.

Self-employed people must additionally pay self-employment tax, which is due every quarter and is based on the net income from their businesses or freelance work. For the majority, this is determining your overall revenue, deducting items like business operating costs or retirement fund payments, and then figuring out your net earnings per quarter.

How Much Will You Pay in Taxes in 2023?

 

Depending on where your small business is located, what form of business organization it is, and the kind of income it produces, you will pay different amounts of small business taxes in 2023. You may be required to pay a variety of taxes, depending on the nature, size, and incorporation of your firm.

C-Corporation Taxes

Federal income taxes known as C-Corp taxes are levied on specific corporate entities. C-Corps, in contrast to other types of business companies, are subject to corporate tax. When shareholders receive dividends or profit distributions from their corporations, they may then be subject to additional taxes.

For the most part, C-Corps are required to pay higher rates than other business forms like sole proprietorships and limited liability companies (LLCs). These companies must also do additional paperwork, such as annual corporation tax filings.

Because there are various levels of taxation involved, C-Corp taxes can be complicated. A business pays taxes at its rate if it is profitable. However, if any shareholders get dividends or take profits out of the business, they can also owe additional taxes.

A C-Corp may be eligible for specific deductions and credits that might help lower its taxable income depending on its size and organizational structure. For instance, it might be able to deduct employee health insurance payments from its taxable income, or it might be eligible for credits for investments in renewable energy technology or R&D.

In addition, C-Corps are required to pay anticipated taxes quarterly throughout the year rather than all at once like most other corporations. This means that in order to avoid penalties or interest charges for underpayment, taxes must be paid four times throughout the year.

Pass-Through Entity Taxes

Businesses with one or more owners are subject to pass-through entity taxes, a type of taxation. Profits, losses, deductions, and credits incurred by the business can be transferred to the owners thanks to this taxation system.

Following that, the owner’s individual tax returns are used to record the income, which is then subject to individual income tax at the owner’s personal rate. Business owners may benefit from pass-through entity taxes, which enable them to pay personal income taxes at a lower rate than corporation profits.

The four types of pass-through entities are:

  • Sole Proprietorship
  • Partnership (Limited and Limited Liability)
  • Limited Liability Company (LLC)
  • S-Corporation

Let’s take a closer look at each of these entities!

1. Sole Proprietorship

Taxes for sole proprietorships are a crucial component of operating a business. You must maintain complete records for your company as the sole owner, and you must submit tax returns annually. As a single proprietor, you must always keep current records of all transactions and utilize an accredited accountant to ensure accuracy when filing returns in order to file taxes correctly.

The main distinction between a sole proprietorship and other enterprises is that for taxation purposes, the business and individual are classified as a single entity. This implies that all business gains or losses pass through to the person, who is then responsible for disclosing them on their income tax return.

2. Partnership (Limited and Limited Liability)

The ownership and income of an organization are divided among the partners under a unique business structure known as a partnership. These companies might be of any size, from startups to mega corporations.

Limited and limited liability partnerships are the two forms of partnerships that exist for tax purposes. There are two basic kinds of partnerships—limited and limited liability—and each has a different tax burden.

In limited partnerships, one partner is designated as the general partner who is responsible for all debts, and the other partners are designated as limited partners who are only responsible for their initial investment. Limited liability partnerships, on the other hand, shield all participants from personal responsibility for any obligations made by the firm.

For the purpose of reporting income and paying related taxes, these two types of partnerships call for particular tax filing considerations. Regardless of whether they get distributions, each partner is required to disclose their share of profits or losses to the Internal Revenue Service (IRS) on their individual tax returns.

3. Limited Liability Company (LLC)

A common corporate structure for small firms is the Limited Liability Company (LLC). LLCs provide owners with liability protection against debts, legal troubles, and tax advantages. Since LLCs do not pay corporate income taxes, their taxes function differently from those of other business entities or people.

Instead, all gains and losses are distributed to the LLC’s individual members, who then report them on their tax returns. An LLC’s members are each responsible for filing their own tax returns and paying income tax at their respective rates on the company’s revenues and losses.

The LLC is obliged to submit an annual informative return to the Internal Revenue Service (IRS), but at this point, no taxes have been paid and the return merely contains information about the LLC’s financial data.

The IRS may require an LLC to file Form 1065 or Form 8832, depending on the number of members in the LLC. Members of an LLC may also be required to file federal income taxes and pay self-employment taxes like Social Security and Medicare.

4. S Corporation

S Corporation taxes can be very complicated, therefore small business owners need to be aware of the relevant laws and guidelines. An S Corporation is a legal company created in accordance with state law that is then exempt from federal taxation, according to IRS regulations.

Instead of paying corporate income taxes, this firm pays its tax obligations through dividends to shareholders. As a result, shareholders are subject to the same taxation on their portion of the earnings or losses as sole proprietors.

How Will You Be Taxed as a Small Business

 

The taxation process can be complicated for small business owners. You will be required to pay taxes to the federal, state, and local governments, just like with any other kind of business. Taxes are based on your income and earnings and are owed at various points during the year.

Percentage of Wages

The percentage of wages is an important component to take into account when calculating small business taxes. Employers must deduct any deductions from the gross salaries they pay their staff in order to calculate the wage percentage.

The amount of taxes that must be paid as a result will be determined by this. The employees are then accountable for contributing a portion of their wages in taxes, which are paid by the company on their behalf. Employers should also be aware of any changes to tax rules or rates that may have an impact on the percentages of wages paid to their staff.

This percentage might range anywhere from 0% to 39% depending on the area. Employers must be careful to determine the proper wage percentages because there may be fines from the government or local tax agencies if too much is withheld from an employee’s paycheck.

Percentage of Gross Sales

Understanding the percentage of gross sales reported on your taxes is crucial while getting ready for small business taxes. All revenue generated by clients during the tax year, including any reductions or credits you may have granted them, must be reported by businesses.

This covers any cash, cheques, or other payments you receive, including credit card fees. The estimate of gross sales should also take into account additional income sources, such as interest received on bank accounts and any non-cash receipts, such as barter transactions.

To calculate their taxable income for the year, firms must deduct any applicable deductions from their overall gross sales figure. Additional deductions may be available to help lower your taxable income, depending on the kind of business activity you engaged in during the year.

Common business deductions include expenses related to running the business, such as: 

  • Rent Payments
  • Advertising Costs
  • Salaries for Employees
Percentage of Income

Small business operators must pay taxes on a portion of their net income in addition to a proportion of their wages and gross sales. This is computed by deducting all permissible costs from the total amount of money made over the course of the year. The amount of taxes owed increases with the business’s income.

Additionally, small business owners need to be mindful of any unpaid municipal or state taxes. Each government agency may impose a separate tax on a small business depending on its size and type. To ensure you are current on all applicable small company taxes, it is crucial to contact your local tax authorities.

Taxes on Property Value

Property taxes are a type of levy imposed on the value of land and/or buildings owned by businesses. This tax is computed as a percentage of the assessed value of the property. It can aid in financing neighborhood schools, public safety, and other services that your state or local government provide.

These taxes play a significant role in raising money for funding crucial government services. However, for small business owners without access to significant quantities of capital, they can also be a significant financial strain. Property taxes increase in tandem with rising property values, which puts a strain on small businesses that might not be able to keep up with the rising costs.

Business owners should be aware that failing to pay these taxes can have serious repercussions, including having liens issued on their property and possibly even having their properties foreclosed if they fall behind on payments. Small business owners must be aware of local tax laws and take action to make sure they are in compliance with all rules that may apply.

Final Thoughts on Small Business Taxes

 

Taxes for small businesses can be challenging and confusing, but they don’t have to be. You may develop confidence in your small business taxes and make sure you abide by the law by using our small business taxes for beginners guide.

Remember, if you have any questions or become lost in the small business tax maze, it is always advisable to seek the advice of a tax specialist. With their assistance, small business owners may relax knowing that they are paying the proper taxes and put more effort into expanding their enterprises.

Are you a small business owner? Do you have any questions about small business taxes for beginners? Contact MCDA CCG, Inc today or let us know in the comments below!

 

One comment

Leave a Reply

%d bloggers like this: